Optical spectroscopy of small metal particles is an important issue in physics and chemistry. The unique optical properties of nanometer-sized particles make them attractive in a variety of biomedical applications such as biosensors or drag delivery implants. Silver and gold nanoparticles with biomolecules adsorbed at the surface are used to identify specific DNA sequences in colloidal solutions. Rapid changes in optical characteristics that accompanies interaction of a nanoparticle with a DNA provides a fast and reliable method of detecting very low concentrations of various biological substances including harmful agents such as anthrax, smallpox, ebola virus, etc. Optical properties of nanoparticles are sharply distinct from those of the bulk metal and are dominated by a collective electron excitation - surface plasmon. It has also been established that a strong electron confinement in these nanostructures has a profound effect on fundamental physical processes such as electron-electron and electron-phonon interactions. These interactions govern the electron dynamics in nanoparticles on subpicosecond time scale which has been investigated using ultrafast nonlinear optical spectroscopy during past several years. We propose to perform theoretical and numerical investigations of the optical properties and electron dynamics in metal nanoparticles and nanoshells, as well as in nanobiomolecular systems with various organic molecules adsorbed on the nanoparticle surface. These structures have have recently attracted tremendous interest due to the tunability of their optical properties which makes them very promising candidates for biomedical applications. Although a substantial experimental work has been done on electron dynamics in nanoshells and nanoshell aggregates, no systematic theoretical description has been developed so far. We will investigate the effect of quantum confinement on various optical characteristics of noble-metal nanoparticles with molecular adsorbates. We will employ density-functional methods to investigate surface local field and their effects on linear and nonlinear optical properties, such us resonance fluorescence and second harmonic generation, that determine optical spectroscopy of hybrid systems. We will also investigate optical properties of recently manufactured metal nanoshells focusing on the effect of nanoshell size and geometry on the electron-electron and electron phonon interactions.